Bloomberg View

Bloomberg View: The Fed Needs to Be Bolder; Obama, Super-PAC Man

February 09, 2012

NEXT STEPS FOR THE FED

The economy is clearly recovering, but bad economic news continues to cancel out the good. Employers added 243,000 jobs in January, and the unemployment rate fell to 8.3 percent. Manufacturing growth picked up in January, too. But consumer confidence slipped. The housing market is still on its back. The Fed has lowered its forecast for growth this year and still thinks downside risks outweigh the upside.

It bears repeating: Further monetary easing is needed and abrupt fiscal tightening should be put on hold. The alternative would be to risk another round of one step forward, two steps back.

The Fed, you could argue, is doing all it can. On Jan. 25 the central bank said it expected to keep interest rates close to zero for almost three years, a newly extended time frame that amounts to a subtle loosening of monetary conditions. Ben Bernanke then went even further.

The central bank has an inflation target of 2 percent, he said—a firmer statement than before and an upward tweaking of the Fed’s inflation goal. (Previously, 2 percent was the top end of an implicit target range.) Bernanke tweaked it again by saying the Fed’s dual mandate to maintain full employment as well as price stability implied patience in bringing inflation back down when the economy is very weak.

From a market psychology point of view, the Fed’s gloom roughly cancels out the comparatively timid steps it is taking to loosen its policy. To be effective, the Fed must be bolder. It should affirm that, under exceptional circumstances, it would permit a period of higher-than-target inflation. When unemployment is high, short-term interest rates near zero, and inflationary pressures diminishing, a rise in expected inflation—so long as it is carefully controlled—is not a problem to be avoided but a necessary part of the solution.

The Fed should also embark on another round of bond buying, known as quantitative easing, to put more cash into the economy. Together these steps would provide effective monetary easing—though not necessarily, one should note, lower nominal bond yields. Indeed, if nominal long-term interest rates keep falling, inflation expectations are subsiding, and the policy isn’t working.

THE PRESIDENT DUCKS A FIGHT

“Release the hounds.” That, in effect, is what President Barack Obama said on Feb. 6 when he affixed his Presidential imprimatur to a Democratic super-PAC called Priorities USA Action.

The political action committee, run by a former Obama White House aide, has been falling behind a slew of Republican super-PACs in the money hunt. Apparently the President concluded that his aloofness was costing the Democratic group. By openly embracing Priorities USA, Obama sent a message to its potential donors that their efforts would be appreciated at the highest level.

The only surprise here is that the President waited so long. Mitt Romney, Newt Gingrich, Rick Santorum, and even comedian Stephen Colbert have all beaten Obama to the super-PAC punch. (Super-PACs are independent committees that can raise unlimited sums from corporations, unions, and other sources.) Gingrich’s campaign would have been buried weeks ago in negative ads (many courtesy of Restore Our Future) were it not for a $10 million rescue package from Gingrich friend Sheldon Adelson to a super-PAC run by a former Gingrich aide.

In a blog post announcing Obama’s move, campaign manager Jim Messina offered the standard disclaimers. Obama didn’t ask for this. He opposed the Supreme Court’s 2010 decision in Citizens United, which opened the door to unlimited corporate donations. He supported legislation to force disclosure of all political contributions. He can’t afford to disarm unilaterally while super-PACs aligned with Romney raise tens of millions of dollars.

The arguments are as undeniable as they are predictable. Yet there is one crucial area of campaign finance, unmentioned by Messina, over which the President has genuine influence: the Federal Election Commission.

The FEC has never been a high-functioning operation. But in recent years it has become at least as significant as the Citizens United decision in aiding and abetting the degradation of American politics. The commission is made up of three Democrats and three Republicans. Like the Democrats, the Republicans stay true to their school, using rulings to advance partisan loyalties. In addition, however, the Republicans are philosophically hostile to the regulation of campaigns, making their job—campaign regulation—oxymoronic. As a result, the commission has failed to produce rules that comply with even the minimal expectations of the Citizens United decision or of laws previously passed by Congress.

Five of the six current FEC commissioners are serving, even though their terms have expired. In fact, the terms of two commissioners, Republican Donald McGahn and Democrat Steven Walther, expired almost two years ago. Yet Obama has nominated no one to the FEC. Given the ardor with which Senate Minority Leader Mitch McConnell of Kentucky opposes campaign-finance regulations, any Obama nomination would almost certainly be filibustered to death. But it’s hard to believe Obama is doing all he can if he continues to duck this fight. With the Supreme Court and Congress effectively out of the picture, the FEC is the only venue left for making reasonable adjustments to campaign-finance law.

In the current polarized environment, it’s hard to imagine an FEC battle would produce the desired change. But paired with Obama’s newsworthy embrace of super-PACs, it could certainly produce a few weeks of vigorous public education.